Two businesses buy the same £60,000 machine in the same month. One will own it outright in four years. The other will not, but will have paid less each month and claimed the cost differently against tax. Neither made a mistake. They simply chose different asset finance products.
Hire purchase and finance leasing are the two most common ways UK businesses fund equipment, machinery and vehicles. They look similar on the surface, since both spread the cost over fixed monthly payments, but they differ in ways that affect your balance sheet, your VAT position and what you are left holding at the end.
What hire purchase actually does
Under a hire purchase agreement, the lender buys the asset and you hire it from them over an agreed term, typically one to five years. You usually pay a deposit at the start, then fixed monthly instalments. When the final payment and a nominal option-to-purchase fee are made, ownership transfers to your business.
The important point is that ownership is the destination. From day one the agreement is structured around you ending up as the owner.
Hire purchase tends to suit businesses that:
- Want to keep the asset for its full working life
- Are buying something with strong residual value, such as an HGV, a tractor or a well-specified machine tool
- Want the asset on the balance sheet as an owned asset
- Are in a position to claim capital allowances on the full cost
What a finance lease does differently
With a finance lease, the lender buys the asset and rents it to you across a primary term. You get full use of it, but ownership stays with the lender. At the end of the primary term you typically have options: extend into a secondary period at a much reduced rental, or arrange for the asset to be sold to a third party, in which case you may receive a share of the sale proceeds.
Because you are not paying towards ownership, monthly payments are often lower than the equivalent hire purchase agreement.
A finance lease tends to suit businesses that:
- Want to preserve cash and keep monthly costs down
- Are funding assets that date quickly, such as IT, telephony or catering equipment
- Prefer to treat the rentals as an operating cost
- Are VAT registered and would rather spread the VAT than pay it upfront
The VAT difference, which is where most people get caught out
This is the practical distinction that catches businesses by surprise.
On hire purchase, VAT is charged on the full purchase price of the asset at the outset. If your business is VAT registered, you can generally reclaim that VAT in full on your next return, subject to the usual rules on business use. That is a useful cash injection, but it does mean finding the VAT upfront in the first place.
On a finance lease, VAT is charged on each rental payment as it falls due, and reclaimed the same way. There is no large upfront VAT outlay, but there is also no early reclaim.
There is a further wrinkle with cars. Where a car is available for private use, VAT recovery is typically restricted to 50% on lease rentals, and blocked entirely on outright purchase in most cases. Commercial vehicles are treated differently. If cars are involved, this is a conversation to have with your accountant before signing anything.
Tax treatment in brief
Under hire purchase, because you are treated as the owner for tax purposes, you can normally claim capital allowances on the full capital cost of the asset, often from the point it is brought into use rather than when it is paid off. Depending on the asset and your company’s circumstances, that may fall under the Annual Investment Allowance or first-year allowances.
Under a finance lease, you do not own the asset, so capital allowances sit with the lessor. Instead, the rentals are generally deductible against profit, subject to the accounting treatment.
Which is better depends entirely on your profit position, your existing capital allowance usage and your accounting year end. A profitable company with unused Annual Investment Allowance may get more benefit from hire purchase. A company with tight cash flow may value the lower monthly cost of a lease more than a tax timing advantage.
Balance sheet treatment is changing
Historically, a finance lease appeared on the balance sheet while an operating lease sat off it, which was one reason businesses chose one over the other.
That distinction is narrowing. Amendments to FRS 102 introduce an on-balance-sheet model for most leases for accounting periods beginning on or after 1 January 2026. If your funding decisions have historically been influenced by keeping obligations off the balance sheet, it is worth revisiting that logic with your accountant, because the goalposts have moved.
A simple way to decide
Ask three questions.
Will the asset still be worth having in five years? If yes, hire purchase and eventual ownership usually makes sense. If it will be obsolete, leasing avoids you owning a depreciated liability.
How tight is cash right now? A finance lease generally means lower deposits and lower monthly payments. Hire purchase asks more upfront but builds equity.
What does your accountant want to see? The tax and accounting treatment can swing the decision either way depending on your specific position. This is one of the few areas where a short conversation before you commit genuinely saves money.
Where a broker helps
The same asset can be funded on materially different terms depending on which lender you approach, because lenders have their own sector appetites, residual value assumptions and rate cards. A lender that is comfortable with plant hire may be lukewarm on catering equipment, and vice versa.
Integrum Finance works with a panel of over 200 specialist lenders, which means comparing structures across the market rather than accepting one bank’s single offer. We can model both a hire purchase and a finance lease against the same asset so you can see the difference in real numbers rather than in principle.
If you are weighing up how to fund equipment, machinery or vehicles, get in touch for a no-obligation quote and we will set out the options.